1

A Body of Theory about Management

Clayton ChristensenHarvard Business School

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What Motivates Employees?

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A Shelf of Theories

12/3/2015 Copyright Clayton M. Christensen 3

7%

4%12%

8%

18% 22%

% of tons

Stee

l Qua

lity

19801975 1985 1990

25–30%55%

Predictable Up-Side Surprises for Analysts

© 2007 Innosight LLC 4

Market Understanding that Mirrors how Customers Experience Life

“The customer rarely buys what the company thinks it is selling him.” - Peter Drucker

12/3/2015 Copyright Clayton M. Christensen 5

The right product architecture depends upon the basis of competition

Perf

orm

ance

Time

Compete by improvingfunctionality &reliability

Compete by improvingspeed, responsiveness and customization

Insurance?

Insurance?

The ResourceAllocation Process:Decisions about what gets resources: what

to do & what not to do

Deliberate Strategy:Analytical project

followed byimplementation

Emergent InitiativesResponses to

unforeseen opportunitiesand problems

Stream of newproducts, services,

processes andacquisitions

Actual strategythat is implemented

Processes of Strategy Formulation and Implementation

Priorities embedded in company’s profit model

Specialist physicians

Personal physicians

Nurse practitioners

Pharmacists

Clinics

Offices

Homes

The decentralization that follows centralizationis only beginning in healthcare

Retail Clinics

Family care

What types of innovation might an organization be incapable of doing?

Customers’ job to be done

Resources

ProcessesProfit Formula

The uniqueness of IHCResources

ProcessesProfit formula

Customers’ job to be done

Disruptive Innovations

Time

Sustaining innovations

Efficiency Innovations

- Create corporate & economic growth;- Create jobs- Need capital

Eliminates jobsIncreases free

cash flow-

Focus of management- Sustain margins Creates little net growth

A manager’s view of growth

New doctrine in Finance

The high priests: business professors; partners in private

equity, venture and hedge funds

1. Return on net assets (RONA)

2. Return on capital employed (ROCE)

3. Internal rate of return (IRR)

4. Earnings per share (EPS)

5. Gross margin percentage

6. Economic value-added (EVA)

7. Marginal cost / marginal revenue

8. Debt/Equity9. Net present

value10.Revenue per

employee

~

Thou shalt measure success by:

Disruptive Innovations

Time

Sustaining innovations

Efficiency Innovation

s- Creates corporate & economic growth;- Creates jobs- Needs capital

- Increases freecash flow

- Eliminatesjobs

Focus of management Creates little net growth

A financial view of growth

Capital superabundance:

• “The growth rate of the real economy of goods and services has been slowing in recent decades, while growth in the financial sector has been accelerating. Bain estimates that total financial assets are today almost 10 times the value of the global output of all goods and services, and that the development of financial sectors in emerging economies will cause global capital to expand by half again by 2020. We are awash in capital”

A World Awash in Money: Capital Trends through 2020, Bain & Company

• Cost of capital is approximately zero

• We struggle to invest it.

Disruptive Innovations

Time

Sustaining innovations

Efficiency Innovations

- Create corporate & economic growth;- Create jobs- Need capital

Eliminates jobsIncreases free

cash flow-

Focus of management- Sustain margins Creates little net growth

A manager’s view of growth

12/3/2015 Copyright Clayton M. Christensen 15

1980 1990

Market-creating innovation and macroeconomic growth

12/3/2015 16

SamSung, 1970

SamSung, DRAM,

1995

SamSung, SmartPhone, 2010

Many more can own & use refrigeration.

And be distributors.

Hire more to make them.

More people start new businesses that are enabled by refrigeration.

And to sell them.

Peltier-Effect refrigeration

Competing against non-consumption of refrigeration

We need to re-think finance

• We are awash in capital– This is not a temporary phenomenon

• Cost of capital is nearly zero– But the cost of distributing capital is not zero.– The Law of Conservation of Modularity– Can we waste capital? What is scarce and costly?

• Central banks’ monetary policies have little traction– The interest rate is irrelevant to investment choice

The Law of Conservation of Modularity

• There are no modular technologies that are slow.

• There are no interdependent technologies that are fast.

• Silicon Valley is big and has money. But it is not the world.

12/3/2015 20

Honda next targeted

American disruption: new customers, new dealers, etc.

Third stage: increasingly focused on sustaining innovation.

Honda began with domestic customers, domestic capital, domestic dealers, etc.

The most attractive growth markets are those that are filled with non-consumption.(Honda)

Non-consumptionof English

12/3/2015 Copyright Clayton M. Christensen 23

Disruptive opportunities

Disruptive Dermatology

Skokie

Fayetteville

RevereBurnsville

San Antonio

Disruptive Disney World

12/3/2015 Copyright Clayton M. Christensen 24

Much of the investment from USA into Mexicohas not been an engine for macro-economic growth

Eliminate non-consumption

Process Technology

Market-creating innovation

Where market-creating innovations comef r o m

Cop yr ight C lay ton M . Ch r i sten sen 2 5

12/3/2015 Copyright Clayton M. Christensen 26

Disruptive Technologies:A driver of leadership failure and the source of new growth opportunities

Perf

orm

ance

Time

Disruptive technologies

Incumbents nearly always win

Entrants nearly always win

Finance becomes not a function of

management, but an independent system

Managers choose same metrics (IRR, ROCE) to

compare and select pension investment firms

Agreement on how to keep score on each provider and competitor, analysts’ spreadsheets enable them to make bets on the scores.

The profession of management becomes the sourcing, assembly, and the shipping of numbers. Growth slows;

unfunded liabilities grow

Finance develops ratios (IRR & ROCE) in

order to compare firms in different

industries.

We’ll do anything for

anybody.

•Overhead = 85% of total

•Overhead increases 30% for each doubling of complexity

•Variable quality

12/3/2015 Copyright Clayton M. Christensen 29Po

lishi

ng D

ept.

Annealing furnace

Turning machines

Tapping equipment

De-burringCut

-off

saw

s

Shipping Department Office areaStorage

Hobbing department

Boring machines

Stampingmachines

Assembly

Shouldice Hospital: Hernia surgery

Dave Snow, asthmaCEO, Medco

National Jewish Medical CenterPulmonary & Respiratory Diseases

Typical hospitals are not complicated. They are impossible.

Fee For service

• Consulting firms• R&D organizations• Diagnostic & intuitive activities of hospitals

solution shops

Fee For outcome

• Manufacturing• Education•Construction• Medical procedures

process Businesses

• Telecommunications• Insurance• EBay• D-Life; Crohns.org

Facilitated networks

Fee For memBership

12/3/2015 Copyright Clayton M. Christensen 31

7%

12%

18%Stee

l Qua

lity

19801975 1985 1990

25–30%

The Flee or Fight Response to Profit

1995

12/3/2015 Copyright Clayton M. Christensen 32

Decentralization is disruptive, and is hard to catch

Perfo

rman

ce

Time

Time

Incumbents dominate sustaining battles

Entrants typically win at disruption

• It occurs when the new is good enough.

• Disruption competes vs. non-consumption;

• What matters on the vertical axis changes.

• Customers & applications are pulled from the old into the new, not vice-versa.

Discovery-Driven Planning is a better way to manage the flow of projects through the development funnel

Platform-based planning

1. Make Assumptions

2. Build projections based upon assumptions

3. Make decisions to invest based upon projections

4. Implement the deliberate strategy

Discovery-driven planning

1. Make Projections

2. What assumptions must prove true for the projections to happen?

3. Implement a plan to learn -- to test whether the critical assumptions are reasonable

4. Move to the next stage when key assumptions prove valid

12/3/2015 33Copyright Clayton M. Christensen

Integrating correctly to get the job done means:

• IKEA• TurboTax;

QuickBooks• Disney• Mayo Clinic• SAS• Zara• NxStage• OnStar• Hilti• Sawzall; Holehawg

12/3/2015 Copyright Clayton M. Christensen 35

• Jobs are very stable over long periods; they are not vulnerable to product life cycles

• Whereas products are easy to copy, integration around a job creates defensible differentiation.

• Less vulnerable to disruption

• Customers are happy to pay a profitable price, instead of negotiation towards a zero-sum relationship.

What’s the job-to-be-done? (Each job has functional, emotional & social dimensions)

Four levels in the architecture of a job

12/3/2015 Copyright Clayton M. Christensen 36

What experiences in purchase & use must we provide to do the job perfectly?

What and how to integrate?

Purpose Brand

12/3/2015 Copyright Clayton M. Christensen 37

Over time, the organizational structure comes to mirror the established product’s architecture.

Organization units created to beresponsible for each aggregate

What’s the job-to-be-done? (Each job has functional, emotional & social

dimensions)

What experiences in purchase & use must we provide to do the job

perfectly?

What and how to integrate?

Purpose Brand

No responsibility for any customer’s experience

X

12/3/2015 Copyright Clayton M. Christensen 38

Original Technology Pure-play deployedagainst non-consumption

Hybrid when deployedas a sustaining technology against consumption

A Theory of Hybrids

12/3/2015 Copyright Clayton M. Christensen 39

A Theory of Hybrids

Perfo

rman

ce

Time

TimePeapod: Are there customers that would love a car that won’t go far, and won’t go fast?

Competing on cost, design, reliability, and

performance on the California Freeway

Tesla $100,000

Prius Hybrid

Outsourcing often sets in motion disruptive business model liquidation

Mother boards

Computer assembly

Supply chain& logistics

Product design

Brand

Dell AsusTek

Simple circuit boards

Mother boards

Computer assembly

Supply chain& logistics

Product design

Brand

12/3/2015 40Copyright Clayton M. Christensen

NASSCO, Avondale

Pharmaceutical Cos.

Petroleum Majors

Auto companies

IT departments

Customer Supplier

Keppel

Quintiles (CROs)

Halliburton,Schlumberger

Tier One Suppliers

TCS, Infosys, Wipro

12/3/2015 41Copyright Clayton M. Christensen

Wall Street Analysts Bloomberg

Outsourcing often sets in motion disruptive business model liquidation

Disruption

Undifferentiable products

Complexity

High infant mortality

Near sightedness

Trajectories; pursuit of profitability; cost allocation

Corporate Disorders

Mental and physical atrophy

Modularity; Listening to customers

Marginal vs. Full costing; listening to customers

Prisoners’ dilemma; processes for management development

Inadequate nourishment of theory

ROCE; Core competence focus

Surg

ical

su

ites

High-speed multi-channel

testers

Imaging: MRI, CT, PET Scanners

Specialist physicians

Personal physicians

Nurse practitioners

Pharmacists

Clinics

Offices

Homes

The reason why many Americans cannot afford health care is not because they are poor. It is because health care is too expensive.

Disruption breaks the trade-offs. Higher quality andlower costs

Trade-offs are binding: Higher quality requires higher costs

12/3/2015 Copyright Clayton M. Christensen 44

The advantage of focuing on a job-to-be-done.

New York Times

AutoTrader.comR

ealtor.comM

etro

Bloomberg

Buy or sell stuff.

Buy or sell a car. Find a job

or fill a job

Sell or buy a home

Keep me productive while I wait

Keep me deeply informed

Up-to-date business news

Help me unwind

12/3/2015 Copyright Clayton M. Christensen 45

Apprenticeship

Tradition

Salesmanship

Decapitation

Religion

Broadconsensus

No consensus

Extent to which there is pre-existing consensus about what actions will lead to the needed results

No consensus Broad consensus

PowerTools

ManagementTools

LeadershipTools

CultureTools

MeasurementSystems

Training

Standard operatingprocedures

Strategic planning

Financialincentives

Negotiation

Exte

nt to

whi

ch th

ere

isC

onse

nsus

on

wha

t we

wan

t

Rituals

Democracy

FolkloreReligion

VisionCharisma

Role modeling

Salesmanship

Coercion

FiatThreats

Role definition

ControlSystems

Decapitation

The Tools of Cooperation

12/3/2015 Copyright Clayton M. Christensen 46

7%

4%12%

8%

18% 22%

% of tons

Stee

l Qua

lity

19801975 1985 1990

25–30%55%

Evaluating investments on marginal rather than full costs biases incumbent leaders to leverage what they have, instead of building what they need

$320

255

65

Minimill

$320

45

275

Marginal

$320

310

10

Existing

Price

Cost

Net

© 2007 Innosight LLC 47

Market Understanding that Mirrors how Customers Experience Life

“The customer rarely buys what the company thinks it is selling him” - Peter Drucker

Ongoing disruption

• American cars (Kia)• US Mail (Internet)• Airbus & Boeing

(Embraer)• Oracle (Salesforce)• Defense (terrorism)• Universities (online)• Suburban Malls

(Amazon)

• Cisco (Hwawei; blade servers)

• Keppel• Align (orthodontists)• Architects (Autodesk)• Construction• Banks (telecom firms)• Kellogg’s (store brands)• Fighters, bombers

(Unmanned aircraft)

12/3/2015 Copyright Clayton M. Christensen 49

Decentralization is disruptive, and is hard to catch

Perfo

rman

ce

Time

Time

Incumbents dominate sustaining battles

Entrants typically win at disruption

40% 20% on $2,000

45% on$250,000

60% on$500,000